David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Poor old Baosteel. It spent decades building up that rarest of creatures, a Chinese state-owned steelmaker that actually makes a profit and isn't drowning in debt. It survived, and even prospered, through a once-in-a-generation collapse in the steel market. Margins widened in the March quarter thanks to a price rebound, according to Bloomberg Intelligence's Yi Zhu.

And then the government comes along and forces it to merge with one of the also-rans.

Wisco racked up 7.5 billion yuan ($1.1 billion) of losses last year, but appears to be turning a corner. It's one of just a handful of large Chinese steelmakers that made a modest profit in the most recent quarter, and analysts estimate it will stay in the black through 2018 -- so the alliance will hopefully do more than fritter away Baosteel's income.

There's even the prospect of synergies. Both companies have mills making flat products for automakers, appliances and other higher-value customers across a swathe of eastern and southern China, limiting their exposure to the currently hot, but more volatile and low margin, construction trade.

Wisco's home city lies upstream from Baosteel's Shanghai base on the Yangtze River, one of China's major inland freight arteries. Its operations across China's south could help consolidate Baosteel's exposure to Guangdong's humming manufacturing economy. The smaller company has even got some stakes in offshore iron-ore mines that could help integrate the group's supply chain.

So much for the positives. Unfortunately, the list of negatives is long, as well.

Wisco's revenue over the past 12 months was about a third of Baosteel's 157 billion yuan, but its 41 billion yuan in net debt is almost three-quarters of Baosteel's 56 billion yuan. Adding Wisco will lift Baosteel's debt to about 64 percent of net assets from 45 percent at present -- a substantial deterioration, even if it remains outside the danger zone. Both Moody's and S&P declared the plan a credit negative for Baosteel Tuesday.

Wisco's net debt

41.2 billion yuan

What's more, Wisco's earnings seem contingent at best. While analysts aren't forecasting any losses for the next three years, they're barely predicting profits either -- just 1.9 billion yuan over the period, about 1 percent of the 183 billion yuan in expected revenue. It wouldn't take much of a shift in iron, coal or steel prices to push that back into the red.

Blink and You'll Miss It

Analysts expect Wisco to break even over the next three years, but only just

Source: Bloomberg

Note: 2015 numbers are actual results. Others are analyst estimates.

Those iron-ore mines aren't so hot, either. Indeed, you could be forgiven for thinking Wisco's raw-materials ventures have been smitten with some sort of ancient curse: Brazilian and Canadian mining businesses that it paid a combined $640 million to buy into in 2009 have since gone bankrupt, while its plan to export rock from the iron-rich highlands of Liberia started shipments in February 2014, just days before the entire area became the epicenter of West Africa's ebola epidemic.

Baosteel probably has the strength to absorb the hit, but it would be better off without Wisco. Size isn't all it's cracked up to be in steel, where the core business of big producers appears to be buying factories and shutting them down. ArcelorMittal, for all its heft, is headed for its sixth consecutive year of losses. China's new champion has a rough road ahead.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Technically, the merger is between Baosteel Group and Wuhan Iron & Steel Group, the state-owned majority shareholders of the two companies with public-market listings. Since these holding companies don't publish their finances separately, we're discussing the effects of the merger on the listed companies they control.